Perfect storm: the fate of U.S. manufacturing lies in the hands of CEOs like Delphi's J.T. Battenberg.

J.T. Battenberg, chief executive of Delphi, laid it right on the line in a recent speech to his peers at an automotive industry conference in Traverse City, Mich. "There's a 'perfect storm' facing the automotive world," Battenberg said. "Hyper-competition, deflationary OEM pricing to the consumer, breakneck globalization, tough environmental and efficiency mandates, stifling regulations, exploding peripheral costs, imploding profitability, massive overcapacity, rising pension costs, rising health care costs and runaway commodity-price increases--particularly for steel and resins--are all critical issues that continue to shake our foundation. This business is not for the faint of heart."

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Battenberg conceded that to survive Delphi and its competitors would have to rethink their business models. Since Delphi, with $28 billion in annual sales, is the largest parts supplier to General Motors, and because the auto industry is at the heart of U.S. manufacturing, his warning seems to apply across the board to many industries.

The 61-year-old Battenberg faces the fight of his life, with huge liabilities that are largely the result of Delphi's birth as a spin-off from GM in 1998. The company, for example, simply can't de-emphasize vehicle parts making as quickly as Battenberg would prefer, meaning that the biggest portion of its business is stuck in a deflationary vortex. Even the third quarter ending Sept. 30 was a reminder of that: Delphi said it expected to post a loss because of GM's substantial production cuts during the period. The third-quarter performance also underscored that Battenberg has yet to get Delphi's top and bottom lines to reflect the turnaround that seems to be under way. Delphi's revenues actually dipped to $26 billion in 2001 from $29 billion the year before. And last year, though revenues were back up to $28 billion, the company posted a net loss of $56 million, the second year in the red of its five years of independence.

Like its former parent, Delphi remains saddled with huge retiree pension and health-care costs that, at best, it can only contain. Over the next several years, Battenberg concedes, Delphi will be whacked again as a wave of retiring white-collar baby boomers take their expertise and ideas out the door with them.

But what Battenberg already has achieved with Delphi is noteworthy, considering what he inherited. After World War II, GM's far-flung network of captive parts-making operations helped it leapfrog rivals. But in the 1970s, it faced serious competition from Japanese imports, and in the '80s, sky-high union wages became an albatross for GM against cheap Asian manufacturing. Vertical integration had turned against the industrial behemoth, and parts operations had become GM's embarrassing stepchild. In the early '90s, the decision was made to spin it off.

Since Battenberg took over, Delphi has made significant inroads in the rapidly consolidating ranks of Tier One automotive suppliers, which have direct contact with the car companies. Delphi has multiplied its business with other original equipment manufacturers (OEMs) as well as preserved GM as its No. 1 customer. Battenberg also has led the company through an inexorable expansion across China and other emerging markets and diversification way beyond the automotive industry. Dependent on its old parent for nearly 80 percent of its revenues at the time of the spinoff, Delphi expects to hit 50 percent non-GM business by the end of this year--exactly what Battenberg initially committed to.

Today, because of Battenberg's unrelenting focus on diversification, Delphi is dominating new markets for electronic devices ranging from Segway scooters to satellite radios to state-of-the-art wheel-chairs, which was one reason the company dropped the word "automotive" from its name. Because Battenberg has created a culture that cherry-picks the best of Delphi's 16,000 scientists and engineers, the company has emerged as a redoubt of high technology in the industrial Midwest. Battenberg also managed to get the United Auto Workers to agree to an unprecedented two-tier wage system that will greatly ease labor-cost pressures on Delphi in the future. "He has delivered so far," says Stephen Girsky, a Morgan Stanley analyst who has been following Delphi for several years. "He's well-connected to his business. He delegates a lot to his guys and surrounds himself with very bright and motivated people. And he empowers his people. Especially given the deck that he was dealt, he has performed pretty well."

In every dealing, Battenberg projects the confidence and smoothness of a born salesman, which distinguished him among the gearheads and bean counters as he rose within GM. The native Missourian started his GM career in high school as a production worker at a Chevrolet plant in Kansas City. He climbed his way up the management ranks to posts such as vice president of the company's former large-car division. Battenberg's reward was to be charged by his superiors in 1992 with the task of getting GM out of the mess that their parts operations had become. "The bottom line was that the GM board was really questioning if GM shouldn't just get rid of the whole shootin' match," says Alan Dawes, a financial executive who worked for Battenberg in Europe and currently serves as Delphi's vice chairman and CFO.

Overhauling Culture

It was up to Battenberg and his crew to figure out how to carve a viable enterprise out of the mess. They triaged the operations, with the most difficult decisions coming on those that were performing alright but that GM could sell to finance the necessary overhaul of essential plants and divisions. "That's where J.T. became the never-ending voice of reality," Dawes recalls. "He was basically saying, 'We need to get competitive.'"

In a way, the excitement of ringing the opening bell for the new Delphi as it gained listing on the New York Stock Exchange would be the high point of the next several years for Battenberg. In addition to rationalizing the many dozens of old GM parts operations, Battenberg also had prepared Delphi for the spinoff by taking out several layers of management and launching aggressive efforts to garner non-GM customers. But he faced the daunting dual challenges of actually pulling off the accelerated diversification that he had promised Wall Street and of creating an entirely new culture, mainly with people who had been used to the hidebound milieu at GM.

Battenberg believed that succeeding at a cultural overhaul would prove the key to everything else for Delphi. He brought in several top executives from outside the auto industry, for example, to inject new energy into Delphi. He established a set of corporate principles that promoted the new credo and began requiring his senior team to teach internal courses in those principles. "A leader has to teach," explains Battenberg, who still instructs classes in leadership three times a week. "If you can't explain and talk about and teach other people what you believe, you won't be successful."

Delphi employees also came to embrace Battenberg's expectation that the company would become an all-around leader in electronics technology and the developer of "game-changing" new products. So while trimming other operations, he has continued to add to the ranks of Delphi scientists and engineers, who introduced more than 130 new products and 117 new processes in 2003, or an average of nearly five per week.

Innovating for New Markets

Battenberg encourages such innovation with incentives such as a corporate hall of fame that admits just 1 percent of technology staffers every year. The CEO exalts the promotion of "excellence" above everything else. "We are more decentralized here than GM was, and that isn't as efficient," Battenberg says. "But it leads to more entrepreneurialism and more innovative decisions."

Partly as a result, Delphi has created and occupied a ground-floor position as supplier of the highly sophisticated electronics for the stabilizing mechanism in Dean Kamen's Segway scooter; while sales of the much-hyped transporter have been disappointing, Delphi's technology has performed well. Its sensors and switches also are entering the $70 billion medical-device market via a new, $80 million contract with Sunrise Medical for high-tech wheelchairs and other home-care products. "Quality is terrible in much of the medical-device field," Battenberg says, "and I think that creates an opening for us." Moreover, all of these adjacent-market pursuits are higher-margin businesses than automotive and are growing between 10 and 15 percent over 2003.

In the automotive business, where the company remains most comfortable, Delphi has secured a position as the leading supplier of satellite radios to both of the startups in the hot segment, XM and Sirius. It also has pole positions in new technology, including a new air-bag system that adjusts for the size of the seat occupant, solid-oxide fuel cells and new forms of mobile multimedia. As a result, Battenberg says he expects to nearly triple Delphi's business with Ford this year compared with 2000, to more than $1 billion annually, and to double its orders from Renault and Nissan, to about $1 billion a year.

Still, Battenberg worries that Delphi and the U.S. automotive industry may not prove up to the intensifying competition being waged with new technology, in part because OEMs and leading suppliers like his company still "may not consistently deploy the collaborative design processes needed."

Battenberg's job is made tougher by the reality that, in the auto business at least, Delphi already has reaped most of its easy gains. "They had guaranteed relationships with GM because of their history as a captive supplier, but now Delphi has to earn each new opportunity," notes David Cole, director of the Center for Automotive Research, in Ann Arbor, Mich. "That's not easy to do right now because it's such a tough period."

Yet at this point, in large part because of Battenberg's head start more than a decade ago, Delphi overall is significantly better positioned than Visteon, the parts-making subsidiary that Ford spun off just three years ago. "Delphi's margins and return on capital remain much better," says Morgan Stanley's Girsky.

The other crucial part of Battenberg's vision for Delphi is global reach. More than 70 percent of its work force already is employed outside of North America, primarily at technical centers in growing automotive markets such as South Korea and China. "You've got to be where the development is," says Battenberg. "You can't do everything remotely" from the U.S.

Delphi has been a factor in China for more than a decade and has invested a total of more than $450 million, and Battenberg has been greatly accelerating the company's presence there. Delphi is pushing this year, he says, to become the first foreign-owned component supplier to top the $1 billion revenue mark in China.

Working Overtime

In Delphi's quick and relatively successful move over the threshold of independence, Battenberg's leadership attributes have proved crucial. For one thing, by all accounts he's not only an exacting boss but also a tireless worker, often putting in 18-hour days for the company--leaving him little time for his avowed hobbies of golfing, skiing and reading John LeCarre novels. "You wake up and you've already got a bunch of voicemails from him," Dawes says. "He's got a metabolism and an attitude for success that allows him to work the wee hours."

There's also Battenberg's vaunted way with one-on-one salesmanship, which remains instrumental in landing big new contracts for Delphi and in nurturing continuing accounts. When meeting with automotive people, for example, Battenberg "comes off as very much of a car guy, so it makes it easy from a salesman's perspective to bring him into the scenario," says Laurie Felax, vice president of Harbour & Associates, a Troy, Mich-based concern that analyzes automotive manufacturing. "His long experience and relationships in the industry are invaluable."

He can be "a persuasive presenter," confirms John Engler, the former governor of Michigan and new president of the National Association of Manufacturers. "He's not following a script, but he sure knows what he's talking about."

The respect he engenders has been crucial in tackling the less pleasant side of his success equation for Delphi: cost reduction. Delphi has sold or closed 128 businesses since 1992. By the end of this year, the company will have reduced its U.S. high-wage work force from nearly 60,000 employees at the time of its IPO to fewer than 30,000. And the UAW deal lowers the wage and benefits package by 65 percent for future employees compared with current ones.

That means reducing typical Delphi compensation from more than $50 an hour for currently employed production workers to perhaps the low $30s an hour for new ones, Harbour & Associates estimates. That's still a far cry from the few bucks an hour that Asian workers receive, "but this agreement allows [Delphi] to be more competitive, ultimately, in businesses where otherwise it wouldn't have been," says Girsky. Already, as it wins new business, Battenberg notes, Delphi has hired a couple hundred employees who are UAW members governed by the leaner pact.

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That might not have happened at all without Battenberg. UAW leadership had been staunchly opposed to such "two-tier" wages at major automotive manufacturers for decades, wanting not to breach the integrity of a wage-and-benefits structure that had made their members some of the best-compensated in the industrialized world. But the UAW simply had seen too many of those jobs disappearing from Delphi. And over the years, Battenberg's transparency about Delphi's cost challenges also gradually helped persuade union bosses. "J.T. said it was time to take a shot at something like this, and his word carries a lot of weight" even with union leaders, says Mark Weber, Delphi's executive vice president for operations and human resources.

After five years, Battenberg and his team believe they've finally managed to shed Delphi of nearly all of the significant baggage from its days as GM's oft-neglected parts subsidiary and set the stage for future growth. The next and even bigger question is whether Delphi can flourish over the longer term and apart from the automotive cycle that has been its existence up until now. Even in Battenberg's most optimistic visions, about half of Delphi always will be automotive. There, the company's prospects depend on whether it can continue to add enough new revenue to offset the deliberate shrinkage of GM as a customer. Analysts believe that procuring business from other OEMs will keep Delphi growing in the North American automotive sector, and Battenberg underscores the company's progress in global markets, and the promise of more.

"Let's remember that more than 70 percent of the world's population has never even been in an automobile yet," he says. "We are truly in the early innings of this game."

The Huge Gap in Labor Costs
Hourly compensation

Chinese Average          $0.70
Other Tier 1 Suppliers
New Delphi Pact         $23.00
Big 3
Old Delphi Pact         $70.00

Source: Harbour Consulting and Delphi

Note: Table made from bar graph.

Delphi's Rough Road
Sales and earnings

                Billions
          Net Sales  Net Earnings

1999      $29.2      $1.1
2000      $29.1      $1.0
2001      $26.1      -$.396
2002      $27.4       $.342
2003      $28.1      -$.056

Source: Delphi

Note: Table made from bar graph.

RELATED ARTICLE: Q & A

A Look Ahead

While J.T. Battenberg has made steady progress turning around the troubled Delphi, tough challenges remain for the auto industry--and for U.S. manufacturing as a whole. Chief Executive Contributing Editor Dale Buss asked the CEO whether America is producing enough engineers and scientists to make it a dominant player in the global economy in the years ahead.

"I'm very concerned about the demographics of our U.S. business. One reason is, the baby boomers are nearing retirement. Unfortunately, the generation behind them is much smaller. We'll have a huge dip that will be exacerbated by the lack of young people, and especially the lack of those who want to go into engineering and scientific work. We only have 62,000 engineering graduates a year in this country to start with, but there are 300,000 a year in India and 700,000 a year in China.

"A couple of things will happen as a result of that. Wages and benefits will go up. With fewer scientists and engineers, they become more and more mobile because they can move company to company and even industry to industry. So this industry has to focus hard on how to retain those talented people we have.

"Companies can soften the blow by setting up technical centers in India and China, which is what many of us are doing. But, in our industry, engineers need to be close to where a customer's engineers are. It's important to have a good, strong engineering base for the tech centers of OEMs in the U.S., as well as Toyota and Honda in Japan, and in China. But demographics won't be our friend for the next 10 years here."